International investments have taken a hit over the past year, as returns fell amid a weakening US economy and the effects of September 11. Meanwhile, the strengthening of the Australian dollar contributed to the lacklustre performance of the offshore share market while aiding domestic results.
Figures from the InTech Research Performance Survey reveal the Australian share market performed strongly in the 12 months to January 31, 2002, with the median manager 1.4 per cent ahead of the benchmark. Perhaps a more spectacular show was the Australian sector outperforming international markets by 21.7 per cent.
But the importance of balance and portfolio diversification means the industry is sticking to its guns on international investing.
Merill Lynch Investment Managers (MLIM) Global Funds International Equities product specialist Nicole Hudson says while returns on international investments in the past 12 months were below the Australian market, good returns have been achieved over the long-term.
“The key is diversification. There will always be periods where they [international investments] will outperform and underperform,” she says.
As product specialist, Hudson is the expert on the ground in Australia. Her role involves liasing daily with MLIM’s global team based in London obtaining updates on the group’s international funds and disseminating the information to local staff, asset consultants, advisers and clients.
Hudson has recognised an increase in popularity of international investments as awareness increases of the investment class’ ability to balance risk.
“International equities have become increasingly popular as financial planners and clients have a greater understanding of the benefits,” she says.
“Financial planners over the years have increased their knowledge, and this filters down to their clients,” Hudson says.
Figures released last year by Rainmaker reported 14.7 per cent of assets under management were allocated to international equities in 1997. In 2001, this had grown to 19.5 per cent and is forecast to grow to 30 per cent by 2010.
While managing risk via international investing is a major issue for managers and advisers, the size of the Australian market and the restrictions this presents also needs to be taken into consideration, further supporting the argument for diversification.
“Australia is under-represented in global markets, with less than two per cent of global markets. So there is another 98 per cent of potential investments,” Hudson says.
Further, she says the Australian market is under-represented in a number of industries, including healthcare and technology, so investing in global equities funds also gives investors the opportunity to access a wider variety of industries and companies.
Berkley Group Investments research manager Sean Webster also advocates a long-term view when analysing international investments.
“In the longer term time frame, there has been a growth in the popularity of international investments, but not over the past 12 months where they have under-performed,” he says.
Berkley takes a specific asset allocation approach to international investing, and Webster says the group encourages its clients to build a portfolio with an asset allocation to suit a particular benchmark. He says at present, the majority of clients are a little below that benchmark.
“With the poor performance of international investments, and also as the Australian dollar has rallied, people are wary about increasing exposure to managed funds that invest in large index stocks,” Webster says.
“What we have seen is that people are more comfortable going into small cap and value, what we call ‘index unaware funds’.”
According to Webster, these are the funds that have performed well, for example the Hunter Hall Value Growth Trust. InTech Research figures also reveals an outperformance in value funds ahead of growth.
In view of the current market, Webster says the best approach for Berkley is medium-term dollar cost averaging.
“We don’t think we need to be aggressive in international at the moment, because we think the Australian dollar has more room to move,” he says.
